School Lecture Series (SLS) School Lecture Series (SLS) School Lecture Series (SLS) School Lecture Series (SLS) Lecture. 1. 2013Lecture. 1. 2013

F b 21 2013

1SLS/Vol. 1/ 2013

February 21, 2013

Money, Monetary Policy and the Central Money, Monetary Policy and the Central B k f T i id d d T bB k f T i id d d T bBank of Trinidad and Tobago.Bank of Trinidad and Tobago.

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© Copyright 2013 Central Bank of Trinidad and Tobago

ThisThis lecturelecture seriesseries isis aa collaborativecollaborative efforteffort betweenbetweenThisThis lecturelecture seriesseries isis aa collaborativecollaborative efforteffort betweenbetweenthethe CentralCentral BankBank ofof TrinidadTrinidad andand TobagoTobago andand thetheDepartmentDepartment ofof Economics,Economics, UWI,UWI, StSt.. AugustineAugustine..pp ,, ,, gg

TheseThese sessionssessions areare structuredstructured toto aidaid studentsstudents pursuingpursuinglifi ilifi i ii E iE i ifi llifi ll hh C ibbC ibbqualificationsqualifications inin Economics,Economics, specificallyspecifically thethe CaribbeanCaribbean

ProficiencyProficiency ExaminationsExaminations.. PresentationsPresentations useuse thethe syllabussyllabusasas aa guideguide butbut alsoalso aimaim toto showshow thethe practicalpracticalasas aa guideguide butbut alsoalso aimaim toto showshow thethe practicalpracticalapplicationsapplications ofof thethe relevantrelevant topicstopics..

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LecturesLectures forfor thethe SchoolSchool LectureLecture SeriesSeries areare preparedprepared bybyCentralCentral BankBank ofof TrinidadTrinidad andand TobagoTobago researchresearcheconomistseconomists andand lecturerslecturers inin thethe DepartmentDepartment ofofeconomistseconomists andand lecturerslecturers inin thethe DepartmentDepartment ofofEconomicsEconomics.. TheThe viewsviews expressedexpressed areare thosethose ofof thetheauthorsauthors andand notnot necessarilynecessarily ofof thethe CentralCentral BankBank oror thetheyyUniversityUniversity ofof thethe WestWest Indies,Indies, StSt.. AugustineAugustine..

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O tline f Presentati nO tline f Presentati nOutline of PresentationOutline of Presentation

f1. History of Money.

2 Functions of Money2. Functions of Money.

3 Money Supply, Demand and Interest Rates.3. Money Supply, Demand and Interest Rates.

4. Central Bank and Monetary Policy.y y

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History of MoneyHistory of Moneyy yy y(Money Never Grew on Trees)(Money Never Grew on Trees)

Picture 1

C di 1. Barter 2. Commodity Money

3.Representative Money 4.Fiat Money

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Functions of MoneyFunctions of Money

The four main functions of money are :

A di f h 1. A medium of exchange .

2. A unit of account.2. A unit of account.

3. A store of value.

4. A standard of deferred payment.

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M ne S lM ne S lMoney SupplyMoney SupplyMoney Supply – This is a measure of how much money is y pp y yin circulation in an economy.

The money supply can be measured using various methods or principles.

In Trinidad and Tobago, the main measures of the money supply are M-1A and M-2.

Other measures of the money supply include M-2*, M-3, and M-3*.

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The Domestic Monetary AggregatesThe Domestic Monetary Aggregates100

80

100

60

80

ions

40

TT

$ B

illi

20

T

0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

9

Currency In Active Circulation M-1A M-2 M-2*SLS/Vol. 1/ 2013

Demand f r M neDemand f r M neDemand for MoneyDemand for Money

Lord John Maynard Keynes identified 3 motives forLord John Maynard Keynes identified 3 motives for

holding money:

1. Transactions motive – day to day transactions.

2. Precautionary motive – unforeseen situations.y

3. Speculative motive – to guard against possible

capital losscapital loss.

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Money Supply and Interest RatesMoney Supply and Interest Rates

MDMS

Graph 1: Equilibrium Interest Rate

i2 E2

E00i0

Ei1

E1

11

M2 M1M0 Quantity of Money

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Graph 2: Interest rate and Investment Spending

MS1 MS

0

E1i1i1

B

i0E0

i0

A

IDMD

0 i0

ΔI

QuantityM0M1

0

Investment expenditure

I0 I10

ΔI

The investment demand function

p

The investment demand function

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Graph 2: Interest Rates and Aggregate Demand and Expenditure

AE = Y

Expe

nditure 

AE0E0

AE1

Desired

 E ΔI

Real GDP 0

45o

Y0 Y1

AD1

P0

E0

13

Real GDP

Y0 Y1

SLS/Vol. 1/ 2013

Central Bank Central Bank of of

T d d T d d d T bd T bTrinidad Trinidad and Tobagoand Tobago

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Mission StatementMission Statement

"The Bank shall have as its purpose the promotion

of such monetary, credit and exchange policies as

would foster monetary and financial stability and

public confidence and be favourable to the

economy of Trinidad and Tobago."

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R ibiliti f th C t l B kR ibiliti f th C t l B kResponsibilities of the Central BankResponsibilities of the Central BankThe Central Bank Act of 1964 entrusts the Central Bank with a range of g

responsibilities, including:

1. Issuing and redeeming currency.

2. Developing and implementing monetary policy.

3. Acting as banker and advisor to the Government.

4. Acting as banker to the commercial banks.

5. Issuing securities on behalf of the Government.

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R ibiliti f th C t l B kR ibiliti f th C t l B kResponsibilities of the Central BankResponsibilities of the Central Bank

6. Managing the foreign exchange market and protecting the external

value of the currency.

7. Investing the country's external reserves.

8. Fostering and promoting financial stability.g p g y

9 Conducting intelligence-gathering and research9. Conducting intelligence-gathering and research.

R l i d i i h b ki 10. Regulating and supervising the banking system.

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Wh M P l ?Wh M P l ?What is Monetary Policy?What is Monetary Policy?Monetary Policy refers to those actions and decisions undertaken by the

monetary authority to create appropriate monetary conditions in line with the

economic objectives of the country.

These actions and decisions are designed to influence interest rates and theThese actions and decisions are designed to influence interest rates and the

money supply which impact on credit demand and investment, which in turn

ultimately affect the overall demand for goods and services.

The Central Bank of T&T conducts monetary policy geared towards the

promotion of low inflation and a stable foreign exchange market that is

conducive to sustained growth in output and employmentconducive to sustained growth in output and employment.

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Monetary Policy Instruments PreMonetary Policy Instruments PreMonetary Policy Instruments PreMonetary Policy Instruments Pre--Liberalization (1993)Liberalization (1993)

Direct Instruments/Less Market Based

1. Interest rate controls

2. Selective credit controls

S i3. Statutory reserve requirements

4. Rediscount (or discount) rate( )

5. Exchange rate controls

6. Moral Suasion 19SLS/Vol. 1/ 2013

Monetary Policy Instruments PostMonetary Policy Instruments Post--y yy yLiberalization Liberalization

Emphasis on more market based instruments.

Monetary policy tools now include:y p y

1. The ‘Repo’ rate

2. Open Market Operations (OMO)2. Open Market Operations (OMO)

3. Liquidity sterilization bonds

4 R di t ( di t) t4. Rediscount (or discount) rate

5. Statutory reserve requirements

6. Requested fixed deposit accounts

7. Moral Suasion

8. FX Interventions

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M P l F lM P l F lMonetary Policy FormulationMonetary Policy FormulationMonetary Policy Committee◦ Meets monthly to make decisions related toy

monetary policy.

◦ Responsible for setting the ‘Repo rate’, reserverequirement and other policy tools.q p y

◦ Articulates monetary policy through the ‘Repo’Articulates monetary policy through the Reporate announcement on a monthly basis andthrough the bi-annual Monetary Policy Report.g y y p

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Picture 2: Channels of Monetary Transmission Picture 2: Channels of Monetary Transmission 

22Source: Boodoo and Cheong, 2010.

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The Interest Rate ChannelThe Interest Rate ChannelThe Interest Rate ChannelThe Interest Rate Channel

23

Source: Boodoo and Cheong, 2010.SLS/Vol. 1/ 2013

The ‘Repo’ Rate 2002The ‘Repo’ Rate 2002--20122012

8.09.0

10.0

E i M

5.06.07.0

Cen

t

Easing Monetary Policy

2 03.04.0Pe

r Tightening Monetary Policy

?0.01.02.0 ?

The Repo rate announcement occurs monthly and can be obtained on

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p ythe Central Bank’s website or within the semi-annual Monetary Policy Report.

Trends in Interest Rates and Loan Growth Trends in Interest Rates and Loan Growth

1214

Selected Interest Rates

468

10

Per

cent

024

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012R R O i h I b k R B i P i L di RRepo Rate Overnight Interbank Rate Basic Prime Lending Rate

50Growth in Business and Consumer Loans

20

30

40

cent

Cha

nge

Business LoansConsumer Loans

0

10

20

on Y

ear

Per

c

-20

-10 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Year

o

25SLS/Vol. 1/ 2013

SummarySummarySummarySummaryEconomic theory shows the relationship between the moneyEconomic theory shows the relationship between the moneysupply and interest rates; and the relationship between interestrates, investment and economic growth.

The Central Bank Act (1964) entrusts the Bank with several keyfunctions, including the design and implementation of monetary, g g p ypolicy.

h k l f l l h hThe Bank uses its arsenal of monetary policy tools such as the‘repo’ rate, OMOs and reserve requirements to fostermonetary, credit and exchange conditions that are favourable toy geconomic growth.

Th l h l f th t t i i OThere are several channels of the monetary transmission. Oneparticularly relevant channel to Trinidad and Tobago is theinterest rate channel. 26SLS/Vol. 1/ 2013

Questions?Questions?Questions?Questions?

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© Copyright 2013 Central Bank of Trinidad and Tobago.

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